Country Report South Korea June 2008

Outlook for 2008-09

• The Grand National Party (GNP) will control parliament until June 2012, but its majority is slim. The president, Lee Myung-bak of the GNP, will try to broaden his political base by unifying rival conservative forces.
• An escalating row over imports of US beef has resulted in demonstrations in South Korea and has undermined Lee Myung-bak's credibility. If imports of US beef do not resume, owing to public pressure, relations with the US could suffer.
• The GNP government’s most immediate foreign-policy challenge is its relations with North Korea. The North will continue to present dilemmas, especially as the stalemate over denuclearisation continues.
• Annual real GDP growth in 2008-09 will average 4.4%, following an increase of 5% in 2007. Private consumption will remain the primary driver of growth.
• In May the government unveiled plans to make South Korea a more attractive place for foreign direct investment (FDI). However, raising FDI will require a major change in the bureaucratic mindset of the government.
• The Economist Intelligence Unit has revised its 2008 exchange-rate forecast, following the continued depreciation of the won against the US dollar in May, to an average of W981:US$1 in 2008 (previously W964:US$1).

Monthly review

• Lee Myung-bak's credibility has continued to suffer, owing to his handling of the beef imports controversy and the fact that he did not foresee the public backlash against the deal.
• Lee Myung-bak made a state visit to China in May. However, it got off to a bad start, with a spokesman in China’s foreign ministry calling South Korea’s military alliance with the US an anachronistic leftover from the Cold War.
• Rising inflationary pressures have limited the government's ability to lower interest rates in order to boost consumer and business spending. The government is therefore trying to stimulate exports.
• Emerging markets are becoming an increasingly important source of demand for South Korea's exports. The free-trade agreement between South Korea and the US, which was agreed in 2007, still has to be ratified, however.
• The government is attempting to increase FDI inflows amid falling foreign investor interest in the country.
• The won continued to weaken against the US dollar in May. The government has, however, been slow to intervene in the foreign-exchange market, possibly because a weaker local currency helps to boost exports.

Source: Country Report